Weekend reading links

1. The WSJ extrapolates from history of stock market crashes,

On March 10, 2000, the Nasdaq Composite Index hit an intraday high of 5132.52. We all know what happened next. By October 2002, the index had fallen 78.4%—to 1108.49. And that was only half the agony. The other half was the index’s anemic recovery from that low. It took until November 2014 for the index to battle back to its March 2000 level, even after taking dividends into account. If you adjust for inflation, the index didn’t recover until August 2017, more than 17 years later.

If the Dow Jones Industrial Average were to follow the same script, it would be trading at around 5400 in October 2022, and not make it back to its current level until November 2034 (or, on an inflation-adjusted basis, the summer of 2037). It is hard to overestimate how devastating such a scenario would be for retirees and soon-to-be-retirees.

2. Nidheesh MK writes about the problems facing Surat's diamond industry as it battles a crippling downturn,

According to a report in The Times of India (TOI) in September 2019, some 40,000 workers were laid off in the preceding year, and 20% of small diamond units were shut and salaries were trimmed across the sector... The city is the biggest processing hub for diamonds in the world. According to estimates, nine out of 10 diamonds sold anywhere in the world would have passed the hands of a worker in Surat. Of the 4.5 million residents in the city—it is among the world’s fastest-growing 30 cities as per recent United Nations data—more than 800,000 people work in the diamond industry, as cutters or diamantaires, workers, wholesalers, traders, brokers, retailers, jewellery fabricators, according to The Diamond Trailby Shantanu Guha Ray. But today, suicides and job losses reflect many trends of a slowdown— declining global sales; international trade wars which make imported diamonds from the US more expensive and less attractive in the biggest diamond market of Hong Kong; the impact of demonetization and the goods and services tax (GST); and more recently, the coronavirus outbreak.

3. A FT explainer on the latest oil war triggered by Saudi Arabia.

Saudi Arabia's decision to turn on the oil spigot loose even as Covid 19 was breaking out will be judged as a very reckless one. 

The biggest loser in the oil war may be Saudi Arabia itself. While for others, including US and Russia, the breakeven cost of oil is more relevant to their respective oil companies, in case of oil-dependent Saudi Arabia, it is of national economic relevance. 

The Economist writes,

Russia—the tactical target of Saudi Arabia’s price war—is different. Since 2014 it has run orderly monetary and fiscal policies. It has been a net provider of credit to the world, not a net borrower. And it has saved a lot of its surplus oil revenue for a rainy day, by basing its budget on an oil price of $40 a barrel. Middle Eastern and African producers (and never mind Venezuela) have not been as disciplined. Saudi Arabia itself needs $80 a barrel to balance the books. 

4. More on the World Bank's Pandemic Bonds which are yet to pay out.

The bonds did not pay out a cent during a severe attack of Ebola in the Democratic Republic of Congo last year and are yet to pay out to relieve effects of the coronavirus outbreak, which has led to at least 110,000 cases worldwide and more than 4000 deaths. Some analysts say the bonds’ terms are too stringent, preventing money from being funnelled to countries where the spread of the pandemic could be resisted.

Be that as may, the allure of financial engineering to solve complex problems will endure.

5. One of the most disturbing things about the aftermath of the global financial crisis has been the failure to convict any executives from the major financial institutions.

In a high-profile reversal, UK's Serious Fraud Office has failed in the first criminal trial to examine steps taken by senior bankers during the financial crisis. The jury exonerated three Barclays executives on allegations of lying to the market in the Bank's official documents on a deal with Qatar to mobilise capital at the height of the crisis. This acquittal follows that of the Bank's Chief Executive earlier.

This raises questions about UK's laws which make it difficult to establish corporate criminal liability.

Prosecutors in England and Wales must demonstrate that the “directing mind” of a company was involved in alleged criminality if they are to prove a company liable. “It is almost impossible to find a controlling mind and prove that controlling mind is complicit in any criminality,” says David Green, director of the SFO when it launched its investigation into Barclays, who argues that prosecutions are being hampered by this legal requirement. “The email chain tends to dry up at middle management level... The current law was developed in the industrial revolution when companies were beginning to be formed and consisted of one person or two or three people so it was very easy to identify who was a controlling mind.”

6. Good article about the changes happening in last mile distribution of groceries in India. The humble kirana shop is emerging as the last-mile warehouse for temporary storage by online grocers.

7. FT writes about the troubles mounting on the corporate debt market,

Companies have gorged on cheap debt for a decade, sending the global outstanding stock of non-financial corporate bonds to an all-time high of $13.5tn by the end of last year, according to the OECD, or double where it stood in December 2008 in real terms. Borrowing costs had tumbled after central banks lowered interest rates to jolt their economies following the 2008 financial crisis. Investors, starved of yield from safer government bonds, saw lending to riskier companies as a way to juice returns... Ruchir Sharma, Morgan Stanley’s chief global strategist, estimates that one in six US companies does not earn enough cash flow to cover interest payments on its debt. Such “zombie” borrowers could keep putting off the crunch as long as debt markets kept letting them refinance.

8. Softbank is apparently fast becoming a persona-non-grata in Silicon Valley. It is true that Softbank's practices have been corrosive and representative of the reckless financing trend in vogue. But it is hardly alone nor has it been the progenitor of this trend, though it has been critical in amplifying these practices. Softbank is merely taking a leaf out of Wall Street's own historical playbook that fuelled many an asset bubbles. The difference being private capital as against public markets.

The pushback in Wall Street to Softbank has more got to do with vested interests in the form of large incumbents like Sequoia being relegated into the margins by the new kid on the block. A touch of racism cannot also be denied.

9. A coronavirus primer with a lot of graphs. Also this. The main priority, at this point in time of the outbreak, may be slow down its spreading, thereby buying time for medical systems to cope with the flow. That may be possible only through isolation.

The Economist has a good technical briefing on SARS-CoV-2 virus which causes Covid 19.

And also a very informative Corona section.

Nice graphic of the progression, how it has tapered off in China.

The Chinese response has been striking in its success,

On February 4th China recorded 3,887 new cases. On March 4th the number was 139. The report that the who group published on February 28th put the good results down to the way that the state had used manpower and technology to implement quarantine meticulously on an unprecedented scale... All over the country cities closed down schools, public transport and almost all social and economic activity to stop people from moving around. In Wuhan, a city of 11m people, the population has been restricted to their homes for five weeks. The lockdown was enforced not just by the network of officials which covers every block of flats, street and alley but also, under the influence of those officials, by the property managers at residential compounds.

The corona mitigation immediate response strategy for the economy,

The first task is to get manpower and money to hospitals. China drafted in 40,000 health workers to Hubei province... Just as important is to slow the spread of the disease by getting patients to come forward for testing when outbreaks are small and possible to contain. They may be deterred in many countries, including much of America, where 28m people are without health coverage and many more have to pay for a large slug of their own treatment. People also need to isolate themselves if they have mild symptoms, as about 80% of them will. Here sick pay matters, because many people cannot afford to miss work. In America a quarter of employees have no access to paid sick leave and only scattered states and cities offer sickness benefits. Often the self-employed, a fifth of Italy’s workforce, do not qualify. One study found that, in epidemics, guaranteed sick pay cuts the spread of flu in America by 40%. Sick pay also helps soften the blow to demand which, along with a supply shock and a general panic, is hitting economies. These three factors, as China shows, can have a dramatic effect on output...

Better to support the economy directly, by helping affected people and firms pay bills and borrow money if they need it. For individuals, the priority should be paying for health care and providing paid sick leave... For companies the big challenge will be liquidity... Firms that lose revenues will still face tax, wage and interest bills. Easing that burden, for as long as the epidemic lasts, can avoid needless bankruptcies and lay-offs. Temporary relief on tax and wage costs can help. Employers can be encouraged to choose shorter hours for all their staff over lay-offs for some of them. Authorities could fund banks to lend to firms that are suffering, as they did during the financial crisis and as China is doing today. China is also ordering banks to go easy on delinquent borrowers. Western governments cannot do that, but it is in the interest of lenders everywhere to show forbearance towards borrowers facing a cash squeeze.

This about paid sick leaves,

A study of paid sick-leave mandates in America by Stefan Pichler and Nicholas Ziebarth, two economists, found that the policy reduced the spread of influenza by 5% in normal times and 40% during a wave.

National responses have been varied. Singapore perhaps did the best in early response to prevent the outbreak. China's actions after the initial bungling has been very impressive. Italy too has responded with great swiftness. S Korea has been very impressive with testing and isolating. Iran, perhaps has been the most shambolic. In terms of being lackadaisical, given the importance of isolation in the strategy, US and UK are perhaps the worst offenders.

In fact, in terms of turnarounds, China's has been very impressive - even as Apple closed down all its stores globally, it re-opened its Chinese stores!

Vikram Patel puts Covid 19 in perspective compared to TB.

An assessment of its impact across a variety of sectors in the US, and on the equity markets here.

10. The majority of Indian startups that attract VC funding are incorporated outside India,

An analysis by Tracxn shows that of 73 SaaS firms that have received at least $20m each in funding, 50 have headquarters outside India. Many flee to Singapore, where expatriate managers can catch a six-hour flight to Delhi or Mumbai, which plenty do on a weekly basis.

Some of the reasons,

To list on India’s main exchanges firms must demonstrate a few years of profits. Laws impede those whose management is based in India from floating overseas (the approach of many successful Israeli startups) without first going public at home. Complex and mutable levies on shares handed to investors and staff in effect give the government first dibs on a firm’s cash.

11. Anirudh Laskar in Livemint chronicles the flawed rise of Yes Bank to become India's fourth largest private bank,

When the going was good, Kapoor was known as the banker who would never say “No". Under Kapoor, Yes Bank was the go-to institution for companies seeking loans. The bank would even lend money to corporates who had been refused by other lenders... All business decisions at Yes Bank, even where the bank’s board was involved, ultimately hinged on Kapoor’s whims and fancies. Many senior employees who couldn’t get along with him ultimately ended up leaving... Yes Bank’s commercial banking modus operandi was to lend to subsidiaries of large corporate groups whose promoters were friends of Kapoor. “When all banks used to refuse to lend to a particular client, Yes Bank would step in. That’s because different kinds of collateral—land parcels, plant machinery, promoter’s guarantees in personal capacity—were taken by them," said an ex-official of the lender on condition of anonymity... Kapoor’s remedy to keep bad loan ratios low was to grow the loan book at a breakneck speed. In the three years leading to FY17, Yes Bank’s loan book had bloated by 76%, which kept bad loan ratios near low single-digits.

While the regulator should obviously take blame, what about Yes Bank's management as well as Board, including the likes of Ashok Chawla?

See also this by Ananth.

The Yes Bank story should lay to rest all the claims about superior corporate governance and performance of private sector banks, as if that evidence was ever required given the experience of the US. All of ICICI, Axis Bank, and RBL have been guilty of corporate governance issues.